Grameen Bank founder Muhammad Yunus pioneered the concept of “micro-credit”—minuscule loans to the very poor. The bank currently lends more than $500 million a year with a repayment rate of better than 97 percent (although critics have reported that some borrowers merely take out additional loans to meet their repayment schedules). Its Group Savings Funds have assets of $186 million. Grameen Bank operates 1,100 branches in half of Bangladesh’s nearly 80,000 villages. The program has been successfully replicated in dozens of countries, including the Philippines, Malaysia, Vietnam, South Africa, and Bolivia. It has also been applied to inner city and rural poverty in rich nations in North America and Europe.

Origins

Muhammad Yunus was born in 1940 to a successful Muslim jeweler’s family in Chittagong, then a part of colonial India. While teaching at a local college in the early 1960s, he noticed a need for a packaging plant in eastern Pakistan and established one with the help of his father and a loan from the state.

In 1965, Yunus left to study at the University of Colorado and Vanderbilt University under a Fulbright Scholarship. While teaching at Middle Tennessee State University in 1971, the War of Liberation broke out in eastern Pakistan, and Yunus lobbied for the Bengali cause in Washington, D.C.

Yunus returned home to the newly formed country of Bangladesh in 1972. Soon he was heading the economics department at Chittagong University. While there, the plight of the poor in the nearby village of Jobra distressed Yunus greatly as famine enveloped the country. With the help of his students, he surveyed the economic situation of the villagers and organized a project to plant higher yielding varieties of rice.

Such agrarian reforms required some financial and political finesse and stirred up considerable controversy. Yunus espoused the view that, as hunger and malnutrition limited a person’s freedom of thought and action, so too was credit itself—access to economic resources—a basic human right. He developed a distrust of governmental and non-governmental aid programs whose funds, usually due to greed or infighting somewhere along the line, simply did not reach the society’s very poorest members.

These people, Yunus found, existed in a cycle of debt, at the mercy of moneylenders charging ten percent interest a week and usurious traders. A person would borrow money for raw materials, work all day, then sell their handiwork back to the trader for a profit of only two cents. In 1976, Yunus had one of his students tally a list of villagers trapped in such situations. She came up with 42 names, who together needed less than US$27.00 to break out of the cycle and set out in business for themselves. Yunus loaned them the money himself.

The professor’s attempts to get traditional banks to lend to poor people who had no collateral met with solid resistance. However, he was able to arrange for such a loan from the Janata Bank after months of wrangling and signing himself as guarantor. With this money, the Grameen Project (literally, “of the village”) was launched in January 1977.

Yunus then set out to develop a lending methodology that would work for his impoverished clients. Rather than have a large lump sum payment at the end of the loan period, he structured the loans with minuscule daily payments in order to detect problems early and to increase borrowers’ confidence. This was soon changed to weekly payments to reduce the accounting load. The term of the loans was set at one year.

Another unique feature was the group of five that prospective borrowers had to organize. All the members would be collectively responsible for each individual’s loan. Besides peer pressure, the groups were also a source of mutual support, and a large reason Grameen would be able to boast repayment rates in excess of 97 percent. Five percent of each loan went into a group fund that served as a kind of insurance.

The groups helped Grameen overcome its greatest source of resistance among the borrowers—purdah, or the set of Muslim practices relating to a woman’s purity. (Although its clientele was evenly mixed at first, the bank soon began to loan more to females, who spent more of their profits on family needs rather than personal desires.) A rigid interpretation of these codes kept women indoors, out of sight of neighbors. In addition, many were afraid to handle money, traditionally the province of the husband. Grameen was able to help these women work within their own homes, more in harmony with purdah than other forms of employment. However, Grameen Bank would have to be vigilant against the practice of “pipelining,” or turning over loans to the husbands for unauthorized uses.

After operating through the Janata Bank for a year, Yunus in 1978 struck up an arrangement with the Bangladesh Krishi (Agriculture) Bank which freed him from having to personally sign for every single loan (the program had under 500 borrowers at the time). The Krishi Bank also hired a few of Yunus’s students, giving them their first salary for this work.

The program was expanded through 25 branches of the Central Bank in 1979. Yunus took a leave of absence to oversee operations in Tangail, in the country’s center. He stepped into a lawless, desperate place but the bank continued to grow. Grameen disbursed $13.4 million in loans in 1981 and $23.9 million the next year, when it had 28,000 members.

In order to prove to skeptics the bank did not run merely through the personal charisma of Yunus, its ambitious expansion plan covered five districts isolated from each other. The plan was financed by the Central Bank and a $3.4 million loan from the International Fund for Agricultural Development. Grameen was able to borrow from the government at a two percent annual interest rate. It charged borrowers 20 percent a year simple interest, paying the principal off first. This resulted in an effective ten to 12 percent annual rate, according to Grameen workers.

Independent in 1983

Grameen was made its own, independent bank in 1983. Yunus served as the government-appointed managing director. Eventually, his position was changed so that he answered to the board of directors; however, the chairman remained a government appointee. The government’s ownership was also gradually reduced from an initial 60/40 majority to 25 percent, which it held with its Somali Bank and the Bangladesh Krishi Bank. The other 75 percent (by 1993, 88 percent) was owned by the bank’s members themselves. Bank headquarters were moved to Dhaka’s financial district.

Against typical institutional resistance, it started a fund for modest housing loans in 1984, which provided ten-year loans in the $125 to $300 range for basic shelters. The way the bank interacted with its members developed as well. Its expectations were reflected in four resolutions adopted at a 1980 workshop which by 1984 had become the bank’s famous “Sixteen Decisions.” These ranged from abstractions—promising to follow the principles of “discipline, unity, courage, and hard work”—to practical mandates—“We shall not live in dilapidated houses…. We shall grow vegetables all the year round.” Also included was a statement against the dowry system.

By the mid-1980s, the Grameen program had garnered international attention and various attempts to replicate it were being made in other undeveloped countries such as Malaysia and the Philippines. Grameen started its own replication program through the Grameen Trust, initially funded by the MacArthur Foundation. At home, it took over a fisheries project from the Bangladesh government.

Other Grameen-inspired programs began to address poverty in the United States from urban Chicago to Sioux and Cherokee reservations. Bill Clinton, then governor of Arkansas, asked Yunus to help set up a similar program in his home state in 1986. The Clintons remained avid supporters of the Grameen Bank. Yunus traveled to the United States in 1987 to testify before a Congressional committee; this resulted in extensive media coverage. Two years later, “Sixty Minutes” dispatched a crew to Bangladesh to report on the bank’s success.

Company Perspectives:

Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral. At GB, credit is a cost effective weapon to fight poverty and it serves as a catalyst in the overall development of socioeco-nomic conditions of the poor who have been kept outside the banking orbit on the grounds that they are poor and hence not bankable. Professor Muhammad Yunus, the founder of “Grameen Bank” and its Managing Director, reasoned that if financial resources can be made available to the poor people on terms and conditions that are appropriate and reasonable, “these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.”

Trying Times in 1991

In 1991, a newly democratic government in Bangladesh made it a policy to forgive all government loans of less than 5,000 Bangladesh Takas or $125. As Grameen Bank was not on the government payroll, it could not forgive its micro-loans and survive, making it unable to share the same windfall with the very poor who made up its own clientele. A horrific cyclone in April 1991 also set back the bank’s efforts considerably.

In 1993, Grameen organized a cooperative, Grameen Uddog (Initiatives), to help desperately poor local weavers sell their goods on the international market. The weavers produced a unique fabric, Grameen Check, which the group pitched in Europe and North America.

By the mid-1990s, Grameen was lending US$500 million a year. Its 1,000 branches served two million borrowers—more than nine in ten of them women—in 35,000 villages. It had 11,000 employees and instituted a pension program for them. The value of its cumulative loans reached US$1 billion in 1996 and US$2 billion in 1998.

Grameen diversified the types of loans it made. Among its new interests, hand-powered wells and loans to support the enterprises of Grameen members’ immediate relatives. There were also seasonal agricultural loans and lease-to-own agreements for equipment and livestock. The bank also posited a new goal for itself: making each of its branches free of poverty, as defined by benchmarks such as having adequate food and access to clean water and latrines.

Most rural villages in Bangladesh lacked electricity and in 1997, Bangladesh had only one phone for every 300 people. Communicating with distant relatives required the use of a messenger and an inordinate expenditure of time. A unique solution was proposed to help the poor communicate, bypassing the infrastructure of land phone lines. GrameenPhone, a four member, for-profit consortium 51 percent owned by Norway’s Telenor, became one of Bangladesh’s three cellular phone providers in 1997. The nonprofit Grameen Telecom unit bought its airtime for resale to village “telephone ladies,” who in turn sold their neighbors access to their own cellular phones, bought with Grameen loans. To power these phones in rural areas, Grameen Shakti was formed to develop solar energy sources. Two other offshoots of the phone program, Grameen Cybernet and Grameen Communications, offered Internet services on a for-profit and nonprofit basis, respectively.

The high cost of healthcare remained one of the Grameen Bank’s biggest concerns, it being one force that could totally wipe out the progress any one borrower made. A health program was set up to provide health insurance at a very low cost (less than $5 per year). Retirement funds were also organized around the profitable Grameen businesses, managed by the Grameen Securities Management Company.

Natural forces also offered up potent problems. In 1998, flooding destroyed the shelters of half the bank’s borrowers and left Yunus scrambling for outside financial support. The momentum of the micro-credit concept continued nevertheless. In the spring of 1999, the Soros Economic Development Fund gave Grameen Telecom a $10.6 million loan to place a cell phone in each of 50,000 villages. As the Grameen Foundation USA established Project Enterprise Peer Lending programs in Harlem and Brooklyn, a launch party for Professor Yunus’s new book at the United Nations’New York headquarters drew numerous celebrities.

Taub, Richard P., “Making the Adaptation Across Cultures and Societies: A Report on an Attempt to Clone the Grameen Bank in Southern Arkansas,”Journal of Developmental Entrepreneurship, Summer 1998, pp. 53–69.

Grameen Bank

Grameen Bank

The genesis of Grameen Bank (GB) can be traced back to 1974, when Mohammed Yunus, a professor in Chittagong University, loaned the equivalent of $27 to forty-two indebted residents of Jobra, a village in Bangladesh. Witnessing the grinding poverty and famine conditions, Yunus and his students conducted surveys and discovered the critical significance of credit for breaking out of the proverbial poverty trap. The distinctive feature of these loans was the absence of any collateral. The success of the experiment was almost immediate and led to the formal establishment of the GB on October 2, 1983, as a semiprivate institution to help alleviate poverty in rural Bangladesh. The word Grameen comes from the Bengali word gram, meaning “village.” The 2006 Nobel Peace Prize was awarded to Yunus and the GB, and today the bank is among the most famous nongovernmental organizations (NGOs) in the world.

Mohammed Yunus was born on June 28, 1940, in the port city of Chittagong, Bangladesh. His father was a goldsmith and his upbringing was comfortable. He was a successful entrepreneur starting a new family business, which he gave up when he received a Fulbright grant in 1965 to study economics at Vanderbilt University. After completing his PhD he taught briefly at Middle Tennessee State University (MTSU). The 1971 civil war and birth of the newly independent Bangladesh convinced him to return home. He first joined the planning commission in Dhaka, but soon returned to academia as the head of the economics program at Chittagong University. From this campus, he studied the economic lives of the poor and came up with the idea of the GB.

Yunus realized that the skilled poor could substantially raise their incomes and standard of living if they could bypass the middleman or the village moneylender, so he focused on how to make institutional credit available to the poor. Established banks had no interest in poor borrowers because the transaction cost of dealing with low-income customers in villages was high, and lending to them would violate the cardinal rule of banking—to lend only against valuable assets, or “collateral.” In his Nobel lecture, Yunus recalled, “I was shocked to discover a woman in the village borrowing less than a dollar from the moneylender on the condition that he would have the exclusive right to buy all she produces at the price he decides. This, to me, was a way of recruiting slave labor” (Yunus 2006).

Gradually, through trial and error and with the help of a dedicated group of students, Yunus developed the concept of a new type of banker who would visit poor rural customers in their homes and workplaces. The small loans are given only to the very poor—mostly women— who are disciplined and ambitious, with ideas for small (micro-) businesses, and successful in joining a team of four. After training, the team member with the best business model receives a micro loan, with the first installment to be paid the following week. Only when the first borrower has substantially returned her loan can the other team members have their projects financed. The average loan is roughly $200 at 16 percent annually. Given the weekly returns, the effective annual interest rates are in the range of 20 to 30 percent, which may sound high, but they are significantly below the rates charged by village moneylenders, which are often around 120 percent annually. The bank offers additional products for its members—home loans, compulsory savings, disaster funds, life insurance, loans to beggars, and so on. The housing loan program has helped construct 640,000 new sturdy homes for its customers. In 1995 the bank stopped accepting donor funds, and today the bank is entirely self-financed and self-sustaining. According to internal studies, 58 percent of its clients have crossed the poverty line.

The Grameen Bank was created by a special presidential proclamation, which makes it a unique institution. At first, the ownership split between government and members was 60:40, but this was later changed to 25:75 in favor of the members or borrowers. The bank has given over $5.7 billion in micro loans since its inception to more than 7 million clients across 73,000 villages in Bangladesh (and with an average of five members in a Bangladeshi household, this amounts to a potential impact on 35 million citizens). A significant percentage of the members (97%) are women, and the loan repayment rate is an impressive 98 percent. As of 2007, the bank has 2,226 branches all over the country. The model with some variations has spread across the world, and can be found in communities in Europe, Latin America, and North America. According to one estimate, today more than 60 million poor worldwide have access to microfinance. The Grameen Bank is a shining instance of the success of idealistic ventures in the struggle against poverty.